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5.

1 Consumer Surplus and Producer Surplus (Page 1 of 21)

5.1

Economics Application: Consumer Surplus and Producer


Surplus.

The Demand Curve p = D(x) from the Consumers Perspective.


Generally, the lower the price of a
product, the more the consumers
will demand the product. That is,
high prices reduce demand and low
prices raise demand. So, generally,
p = D(x) is a decreasing function.
The Supply Curve p = S(x)
from the Producers Perspective.
Generally, the higher the price of a
product, the more the producers
are willing to supply. That is, high prices increase supply and low
prices decrease supply. So, generally, the supply curve is an
increasing function.
The Equilibrium Point ( xE , pE ) is the intersection of the supply
and demand curves.
Utility, U, is an economic idea. When a consumer receives x units
of a product a certain amount of pleasure, or utility, is derived from
it. For example, seeing four movies in a month gives you more
utility that seeing one movie.

5.1 Consumer Surplus and Producer Surplus (Page 2 of 21)

Example A
The graph shown is the demand curve
for the number of movies Sam will see
in a month. The total benefit (utility;
measured in $) Sam receives for seeing
one movie in a month is the area under
the curve over the interval
[0, 1].
a.
Compute Sams utility for seeing
one movie per month.

b.

If the average cost of a movie is $8.80, what is Sams


average expenditure for the month?

c.

What is the benefit Sam received for seeing the movie, but
did not pay for? This is called the consumer surplus.

d.

Compute Sams utility (benefit)


for seeing two movies per
month.

b.

If the average cost of a movie


when seeing two movies per
month is $7.50, what is Sams
average expenditure for the
month?

c.

What is the benefit Sam received, but did not pay for? This is
called the consumer surplus.

5.1 Consumer Surplus and Producer Surplus (Page 3 of 21)

Consumer Surplus
The consumer surplus is the
total utility minus the total
expenditure. In general,
suppose that p = D(x) is the
demand function for a
commodity and D(Q) = P .
Then the consumer surplus is
defined for the point (Q, P )
as
Q

! D(x) dx " P #Q .
0

Example 1
Find the consumer surplus for the demand
function given by D(x) = (x ! 5)2 when x = 3.

5.1 Consumer Surplus and Producer Surplus (Page 4 of 21)

Producer Surplus
Now lets look at the supply
curve for movies. At a price of
$0 per ticket, the supplier is
willing to supply 0 movies per
month. At a price of $5.75 per
ticket, the supplier is willing to
supply 1 movie per month.
a. What are the total receipts
the theater (producer)
receives for supplying
Sam with one movie per
month?

b. What does it cost the theater (producer) to show one movie per
month?
c.

Compute the total receipts minus the total cost? Explain its
meaning in this application.

d. The area of the green triangle is $2.875 and is called the


producer surplus; it represents the [suppliers] surplus over its
cost; it is a contribution to profit. The producer surplus is the
total receipts minus the total cost. It is the benefit the producer
receives when supplying more units at a higher price, rather
than supplying fewer units at a lower price. Find the producer
surplus for supplying Sam with one movie per month for
$5.75?

5.1 Consumer Surplus and Producer Surplus (Page 5 of 21)

e.

Now suppose that the theater is


willing to supply two movies per
month at a ticket price of $7.50
each. What are the total receipts
for supplying Sam with two
movies per month?

f.

What does it cost the theater


(producer) to show Sam two movies per month?

g. Find the producer surplus for supplying Sam with two movies
per month?

5.1 Consumer Surplus and Producer Surplus (Page 6 of 21)

Producer Surplus
Now suppose the supply function is
p = S(x) and the theater shows Sam
Q movies when the price is P, that is
S(Q) = P . The producer surplus is
the total receipts minus the area
under the curve and is given by
Q

P !Q " # S(x) dx .
0

Example 2
when x = 3.

Find the producer surplus for S(x) = x 2 + x + 3

Equilibrium Point
The equilibrium point ( xE , pE ) is
where the supply and demand curves
intersect. This is that point where
sellers and buyers come together and
purchases and sales are actually
made. It is the point where consumer
and producer surpluses are defined.

5.1 Consumer Surplus and Producer Surplus (Page 7 of 21)

Example 3
Given D(x) = (x ! 5)2 and
S(x) = x 2 + x + 3 , find each
of the following.
a. The equilibrium point.

b. The consumer surplus at the equilibrium point.

c. The producer surplus at the equilibrium point.

5.2 Applications Accumulated Exponential Functions (Page 8 of 21)

5.2

Applications of

Recall:

P0 ekt dt and

"

P0 e! kt dt

dP
= kP is equivalent to P(t) = P0 ekt
dt

Example 1
Business: Growth in an Investment. Find the
balance in a savings account 3 years after $1000 is invested at 8%,
compounded continuously.

Future Value of a Continuous Money Flow


If the yearly flow of money into an investment is given by R(t) ,
then the future value of the continuous money flow at interest
rate k, compounded continuously, over T years is given by

"

R(t)! ekt dt

Example 2
Business: Future Value of a Continuous Money
Flow. Find the future value of a continuous money flow if $1000
per year flows at a constant rate into an account paying 8%,
compounded annually, for 15 years.

5.2 Applications Accumulated Exponential Functions (Page 9 of 21)

Example 3
Business: Continuous Money Flow. Consider the
continuous money flow into an investment at the constant rate of
P0 dollars per year. What should P0 be so that the amount of a
continuous flow over 20 years at an interest rate of 8%,
compounded continuously, will be $10,000?

Consumption of a Natural Resource


Suppose that P(t) = P0 ekt is the annual
consumption of the resource in year t.
Since the consumption grows
exponentially at a growth rate of k, the
total consumption of the resource after T
years is given by
T
P0 kT
kt
P
e
dt
=
(e " 1) ,
!0 0
k
where P(0) = P0 .
Example 4
Physical Science: Gold Mining. In 2000 (t = 0)
world gold production was 2547 metric tons, and it was growing
exponentially at a rate of 0.6% per year. If the growth continues at
this rate, how many tons of gold will be produced from 2000 to
2013?

5.2 Applications Accumulated Exponential Functions (Page 10 of 21)

Example 5
Physical Science: Depletion of Worlds Gold
Reserves. In 2000 (t = 0) world gold reserves were estimated to be
77,000 metric tons. Assuming growth rate of production given in
example 4 continues and no new reserves are discovered, when
will the world reserves of gold be depleted?

Present Value
The present value, P0, of an amount P, when P0 is invested at
interest rate k, compounded continuously, and due t years later, is
given by
P0 = Pe! kt
Example 5
Business: Present Value. Find the present value of
$200,000 due 25 years from now, at 8.7% compounded
continuously.

5.2 Applications Accumulated Exponential Functions (Page 11 of 21)

Accumulated Present Value


The accumulated present value, A, of a continuous money flow
into an investment at a rate of R(t) dollars per year from now until
T years in the future is given by

A=

"

R(t) e! kt dt ,

where k is interest rate, compounded continuously.


Example 7
Business: Accumulated Present Value. Find the
accumulated present value of an investment over a 5-year period if
there is a continuous money flow of $2400 per year and the interest
rate is 14% compounded continuously.

5.3 Improper Integrals (Page 12 of 21)

5.3

Improper Integrals

Example A
Area Under a Curve. Find the area of the region
under the graph of y = 1 / x 2 over the interval [1, !] .

Example B
Area Under a Curve. Find the area of the region
under the graph of y = 1 / x over the interval [1, !] .

5.3 Improper Integrals (Page 13 of 21)

Improper Integral
An improper integral is one in which at least one of the limits of
integration is ! or ! " .

"

f (x) dx = lim " f (x) dx


b#!

If the limit exists, the improper integral is convergent. Otherwise,


the integral is divergent.
Example 1
Evaluate Improper Integrals. Evaluate each
integral or state that it is divergent:
a.

b.

"

"

4e!2 x dx

ln x dx

5.3 Improper Integrals (Page 14 of 21)

Improper Integral
An improper integral is one in which at least one of the limits of
integration is ! or ! " .
1.
2.
3.

"
#
#

a
b
!"
"

!"

f (x) dx = lim " f (x) dx


b#!

f (x) dx = lim # f (x) dx


a$"

f (x) dx =

!"

"

f (x) dx + # f (x) dx
c

Example C
Evaluate Improper Integrals. Evaluate each
integral or state that it is divergent:
a.

b.

"

!"

!"

e2 x dx

xe! x dx
2

5.3 Improper Integrals (Page 15 of 21)

Accumulated Present Value


The accumulated present value, A, of a continuous money flow
into an investment of P dollars per year from now until T years in
the future is given by

P
1! e! kt ,
"0
k
where k is interest rate, compounded continuously. If the money
flow is to continue perpetually (forever), then take the limit at t
approaches infinity.
A=

Pe! kt dt =

Example D
Business: Accumulated Present Value.
a.
Find the accumulated present value of an investment over a
5-year period if there is a continuous money flow of $2400 per
year and the interest rate is 14% compounded continuously.

b.
Find the accumulated present value of an investment with a
perpetual money flow of $2400. Assume the interest rate is 14%
compounded continuously.

5.3 Improper Integrals (Page 16 of 21)

Accumulated Present Value


The accumulated present value, A, of a continuous money flow
into an investment of P dollars per year from now until T years in
the future is given by
T
P
A = " Pe! kt dt = 1! e! kt ,
0
k
where k is interest rate, compounded continuously. If the money
flow is to continue perpetually (forever), then take the limit at t
approaches infinity and
"
%P
( P
A = # Pe! kt dt = lim ' 1! e! kt * =
0
t$" & k
) k
P
A=
k

Example 2
Business: Accumulated Present Value. Find the
accumulated present value of an investment for which there is a
perpetual continuous money flow of $2000 per year. Assume the
interest is 8% compounded continuously.

5.6 Volume of a Solid of Revolution (Page 17 of 21)

5.6

Volume of a Solid of Revolution

Theorem 1
For a continuous function f denied on [a, b], the volume, V, of the
solid of revolution obtained by rotating about the x-axis the area
between the graph of f and [a, b] is given by

V=

"

! [ f (x)] dx
2

Example 1
Volume of a Solid of Revolution. Find the volume
of the solid of revolution generated by
rotating about the x-axis the region
under the graph of y = x from x = 0
to x = 1.

5.6 Volume of a Solid of Revolution (Page 18 of 21)

Example 2
Volume of a Solid of Revolution. Find the volume
of the solid of revolution generated by rotating about the x-axis the
region under the graph of y = e x from x = -1 to x = 2.

5.7 Differential Equations (Page 19 of 21)

5.7

Differential Equations

A differential equation is an equation that contains a derivative.


Example A
Show that the differential equation, from Chapter 3,
dP
= kP , with P(0) = P0
dt
has the solution P(t) = P0 ekt .
Example 1

Solve y! = 3x

Example 2

Solve f !(x) = e x + 5x " x1/2 , given that f (0) = 8 .

5.7 Differential Equations (Page 20 of 21)

Example 3
Verifying a Solution. Show that y = 4e x + 5e3x is
a solution of y!! " 4 y! + 3y = 0 .

Example B

Separation of Variables.

Solve

Example 4

Separation of Variables.

Solve 3y 2

where y = 5 when x = 0.

dy
= 2xy .
dx

dy
+ x = 0,
dx

5.7 Differential Equations (Page 21 of 21)

dy x
=
dx y

Example 5

Separation of Variables.

Solve

Example 6

Separation of Variables.

Solve y! = x " xy